| Fri Sep 25, 2015 6:18am BST
Insight - U.S. companies quicker to give board seats to activists
Michael Flaherty and Anjali
Cheniere Energy Inc
CEO Charif Souki speaks during the IHS CERAWeek 2015 energy
conference in Houston, Texas April 22, 2015.
Early in August, a call came into Sysco Corp (SYY.N)
from Trian Fund Management LP, warning the food distributor that the
activist hedge fund was about to disclose a large stake in the
Trian, run by veteran investor Nelson Peltz, unveiled its 7.1
stake in Sysco on Aug. 14, and asked for board representation and for
the Houston-based company to improve its profitability and return
money to shareholders.
Six days later, Sysco awarded two board seats to Trian.
For Sysco, it was better to reach a quick agreement than risk a
drawn-out battle, a sentiment increasingly felt across Corporate
"That's a significant amount of shares (owned by Trian), and we're
at a key point in the business right now, and really, they have a
history of bringing value to corporations," said Sysco Chief Executive
Bill DeLaney in an interview, recounting the Trian approach to
Reuters. "We didn't want to have a lot of disruption and a lot of
uncertainty in the business."
In the case of Cheniere Energy Inc (LNG.N),
Carl Icahn needed just 18 days to clinch a deal for two board seats
after the activist bought 8.2 percent of the liquefied
natural gas company in August.
ConAgra Foods Inc agreed to a board settlement with Jana Partners in
July, three weeks after the activist investor scooped up shares of the
processed food company.
While not all companies are as quick to cut a deal as Sysco and
Cheniere, data reviewed by Reuters shows that corporate management
teams are reaching agreements with activists at the fastest pace since
the financial crisis.
The average number of days it takes companies to reach a
settlement with activists threatening a proxy contest from the time of
disclosure is 56, according to media and research firm Activist
Insight, down from 83 days in 2010 - the furthest back the firm's data
on the subject goes.
The quickening pace of activist settlements shows how dissident
shareholders are reshaping the way chief executives manage their
businesses and their boardrooms. Backed by powerful institutional
investors, activists are moving from outside agitators to influential
Some investors worry that companies are bowing to activists'
demands too easily, to the detriment of their long-term shareholders'
"Boards have become quick on the trigger to grant seats to
activist investors just to avoid a proxy fight," said Scott Stringer,
New York City's Comptroller, who called the trend "disturbing."
When decisions are made before shareowners can weigh in with a
vote, "companies run the risk of prioritising short-term expediency at
the expense of long-term value," said Stringer, who runs the $165.5
billion New York City Employees’ Retirement System.
Activists typically acquire chunks of companies, and then push the
company's management team to make changes to boost shares, such as
buying back stock, selling poorly performing units, or restructuring
the business. The most effective way for an activist to effect change
is by being on the board of directors.
Companies previously could depend on large institutional
investors, such as pension and mutual funds, to back their management
teams in the event of a proxy fight. That guarantee has steadily
According to Proxy Insight, the percentage of dissident proxy
cards that BlackRock, T.Rowe Price and Vanguard have voted to support
- meaning they supported at least one dissident board candidate - has
increased every year since 2011. For T. Rowe Price, the percentage has
doubled to 50 percent, the Proxy Insight data show.
Last October, activist Starboard Value LP won an standoff with
Darden Restaurants Inc, convincing shareholders to replace the entire
board of the Olive Garden parent – with BlackRock and State Street
voting in support of the dissident slate. Darden shares have jumped 36
percent since the board's ouster.
Advisors to companies on activist situations say that, while some
settlements may look fast based on when activists go public with their
stake, some occur after lengthy, behind-the-scenes discussions with
companies and their other shareholders. These advisors also concede
that executives will still fight if necessary, especially against
smaller upstart funds that have less clout.
In the case of Sysco, the company was up against a board
nomination deadline and one of its industry's most venerable
investors. Peltz has agitated at several food and beverage companies.
He was instrumental, for example, in carving out snacks maker Mondelez
International Inc (MDLZ.O)
from Kraft Foods Inc in 2011.
Sysco unveiled last week a three-year plan to achieve at least
$400 million in annual operating income growth through efficiencies
and cost cuts. It said it was working on the plan before Trian showed
"I think companies are starting to conduct a type of
self-examination when they receive a phone call or letter from an
activist," said Francis Byrd, an independent corporate governance
consultant in New York. "Where companies are doing their homework,
they will say, 'maybe these folks might have a point'".
When chemical conglomerate DuPont (DD.N)
won its proxy fight against Trian in May, its victory was seen as a
potential blow to activists that could embolden more boards to fight
dissidents to the bitter end. But 2015 has been marked more by truces
One reason is the increasing aversion toward a proxy fight.
A study published last month by professors at the University of
Texas at Austin's McCombs Business School referred to research that
said the average cost of a proxy fight for both sides is around $10.7
million. DuPont, which spent $15 million to fight Trian, has seen its
stock drop 33 percent since the May win, shedding almost $21 billion
in market value.
For furniture company Ethan Allen, which is under siege by Sandell
Asset Management, such a proxy cost is more significant. If the $824
million company spends the average amount of money to fight Sandell,
it would equal about one-third of Ethan Allen’s free cash flow,
according to Thomson Reuters data. Beyond the price tag, companies are
seeking to avoid the distraction of an activist campaign that gets
Activists are also becoming more successful in winning the support
of other shareholders, such as mutual, index and pension funds, which
in turn are putting pressure on companies to settle. For their part,
companies no longer see giving one or two seats to an activist as
particularly dilutive to their board.
Peltz, for example, is known for his food industry expertise and
for working closely with management teams rather than against them.
While every proxy fight is different, the overall odds are not
favourable to companies itching to fight, and this can also make them
reluctant to participate in a protracted dispute. In proxy fights
where board seats were sought at U.S. corporations, the dissident
shareholders' success rate rose to 73.1 percent last year, compared to
less than half in 2012, according to data from research firm FactSet.
"What would happen in the past, the board would say,
'thanks-but-no-thank you,'" said Byrd. "Activists are demonstrating
that they're being reasonable. They're not looking to change
(Additional reporting by Anjali Athavaley in New York and
Ross Kerber in Boston; Editing
Greg Roumeliotis, Carmel
Crimmins and John Pickering)